Tesla (TSLA 8.22%) stock rose by 70% during 2024, catapulting the company to a market capitalization of more than $1 trillion. But the stock actually spent most of the year trading in the red -- it didn't gather momentum until Donald Trump won the presidential election in November.
Tesla CEO Elon Musk put his cash and influence behind the Trump campaign, and investors are speculating the company will benefit from lighter regulations under the incoming administration, which might help fast-track its artificial intelligence-powered full self-driving (FSD) technology.
FSD has the potential to transform Tesla's economics, but the company faces a serious challenge in the shorter term. Its electric vehicle (EV) sales shrank in 2024, the first annual decline since Tesla launched the Model S in 2011.
That's a problem because Tesla stock is unquestionably expensive right now, and its current valuation is very difficult to justify while its EV business is shrinking. Here's why I think the stock will decline in 2025 and drop out of the trillion-dollar club.
Image source: Tesla.
Musk says EV deliveries will grow in 2025, but how?
Last week (on Jan. 2), Tesla reported its production and delivery numbers for the fourth and final quarter of 2024. It delivered 495,570 electric vehicles to customers, which was below Wall Street's consensus forecast of 504,770. It took the company's total deliveries for the year to 1.79 million, down 1.1% from 2023.
Even though Tesla stock soared last year because of the potential of its FSD technology, EV sales still account for 79% of the company's revenue. Therefore, if this part of its business isn't performing, it becomes hard to justify further upside in its stock price (more on that later).
Musk recently told investors EV deliveries could grow by 20% to 30% in 2025, but at the same time, he said he was canceling plans to produce a new low-cost model. Conflicting media reports emerged over the last few weeks that suggest Tesla is now planning to launch an affordable EV called the Model Q sometime this year, alongside a cheaper variant of its popular Model Y.
Tesla might struggle to grow its sales without selling entry-level EVs, because competition is surging from low-cost manufacturers in countries like China. BYD, for example, sells an EV called the Seagull for less than $10,000 in China, and it's likely to enter Europe during 2025. China and Europe are critical markets for Tesla, and since its cheapest EV is currently priced at around $30,000, it simply can't compete.
It's all about full self-driving, but meaningful revenue could be years away
The reason Musk wanted to scrap plans for a low-cost EV is because he wants Tesla to focus on autonomous EVs instead, like its new Cybercab robotaxi. It was unveiled in October last year, and it will enter mass production sometime in 2026.
The Cybercab won't come with pedals or even a steering wheel, because it will run entirely on Tesla's FSD software. Owners of Tesla's passenger EVs can already use FSD in beta mode, but the company hopes it will be approved for full unsupervised use in California and Texas this year. That's why having a friendly regulatory regime in the U.S. could be so valuable to Tesla.
Tesla intends to build its own ride-hailing network so the Cybercab can earn revenue around the clock by hauling passengers -- think Uber except without human drivers. Plus, consumers will be able to buy the Cybercab for personal use, or they can buy a fleet of them to run an autonomous ride-hailing service of their own using Tesla's network.
Simply put, full self-driving technology will create several new ways for Tesla to earn revenue. Cathie Wood's Ark Investment Management estimates the company will generate $1.2 trillion in annual revenue by 2029, with FSD and the Cybercab accounting for 63% of that total. Another top Wall Street analyst, Dan Ives, also predicts FSD will become a $1 trillion opportunity over time.
Tesla's valuation is sky-high, which poses a big risk to investors
The primary reason Tesla stock could decline this year is because of its lofty valuation, which isn't justifiable based on the current state of its business.
The company delivered $3.65 in earnings per share (EPS) over the last four quarters, placing its stock at a price-to-earnings (P/E) ratio of 104. It's significantly more expensive than every other tech stock with a valuation of $1 trillion or more -- except for Broadcom, which isn't a consistently profitable company (so its P/E ratio is skewed):
AVGO PE Ratio data by YCharts
Remember, Tesla's EV deliveries declined in 2024, and a shrinking business normally warrants a lower P/E ratio, not a higher one. And even if investors believe in products like FSD and the robotaxi, the Cybercab isn't scheduled for mass production until 2026.
That means investors are paying a huge premium for Tesla stock in the hope of seeing meaningful FSD revenue that might not come for another two years. In reality, 2025 will probably be similar to 2024, meaning the majority of Tesla's financial results will hinge on EV sales.
Tesla's market capitalization is currently $1.2 trillion, so it only has to fall by 16% to drop out of the trillion-dollar club. I think an even steeper decline might be possible this year. The stock would have to fall by 47% just for its P/E ratio to trade in line with Nvidia's P/E ratio, for example, which would result in a market cap of around $630 billion.
